Understanding Compounding: Berkshire's Not-So-Hidden Dividend Contrarian Secret

Alice Schroeder’s biography of Warren Buffett, The Snowball, takes its title from a quote of his, “Life is like a snowball: the trick is finding wet snow and a long hill.” Warren Buffett has long been lauded as the best investor of our day. And Berkshire Hathaway (BRK-A, BRK-B) has been envied for its superior long-term performance. Many reasons have been given for this record. One that has received perhaps less attention is the efficiency with which Berkshire has been able to compound. To try to understand better how compounding manifests itself in investing, let’s start with a simple model: You have an account which holds a single position of $10,000 all of it in a bond bought at par paying 10% and maturing in 20 years. The first question is, what is the return on the bond at maturity? Yield to Maturity (YTM) says 10%. But, now, assuming that... Read more